Nov

1

Last summer I gave talks to students about money and monetary history at Foundation for Economic Education, Independent Institute, and Economic Thinking seminars. I explained how the government had dramatically reduced the value of the dollar (students rarely guessed how Motel 6 got its name, for example). I played a fun YouTube clip from an Austin Powers movie where Dr. Evil, after hibernating through the high-inflation 1970s, returns to ransom the world for "a MILLION dollars".

But after giving these presentations a number of times, explaining how the gold standard maintained the value of the dollar, and arguing the benefits of commodity-based money, I started wondering if financial innovation had addressed some of the concerns of government paper money losing value.

Have most Americans already returned to a commodity-based system? People have bank and investment accounts containing money market funds, stocks, bonds, and other liquid assets. How much money do most people keep in paper currency on any given day? On payday, they receive a check or electronic payment that converts assets from the employer's portfolio (stocks, bonds, money market funds, gold) to cash–for a few hours or days–until the cash enters the employee's bank account, and is spent on goods and services, or allocated from checking, savings or money market accounts to various commodities or investments.

So much of the physical world has been sliced up into paper (or computer bits) representing tiny slices of every imaginable asset. Most can be converted back and forth, to and from cash, quickly by tapping keys on a home laptop, and exchanged for goods on Amazon–goods that may arrive just a few hours after the transaction is processed.

The commodity exchange system is based on trust. Sellers trust buyers, and buyers trust sellers and intermediaries like Amazon, Visa, and American Express. People may not trust the government and the Federal Reserve, but as people convert their assets to money for purchases, their wealth is exposed as fiat currency for only a few days, hours, or just minutes, on its way to be exchanged for goods or services purchased.

Technologies allow most people protection from paper money uncertainties. Inflation raises the value of their assets as it raises the prices of the goods and services they purchase.